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Traditionally, to meet growing electricity demands, we have simply built more power plants and added lines to distribute the power to customers. But these improvements are expensive, costing up to $2,000 per kilowatt of capacity. To put that in perspective, the average home consumes around 2 kilowatts of power per hour, so building to serve just 1,000 homes could cost $4 million.

Building more power plants is also not an environmentally-friendly approach to the increasing demand for electricity. Instead of producing more energy, could the solution be to revise the current power distribution network and markets to use the energy we have more efficiently, and harness renewable energy resources such as wind and solar power?

Proponents of “smart grid” technologies think so. “Smart grid” refers to applying communication and information technologies to the nation’s power grid system—a complex network that routes electricity from the energy utilities to the consumers. There are control stations at key points on the grid that monitor electricity use regionally and across the country. Because electricity cannot be stored in large quantities, it must be produced on demand. So, when consumption hits very high levels, the control stations must activate reserve power plants, known as “peaking” power plants, or re-route electricity from other parts of the country, to meet energy needs.

The grid as it exists today was originally designed more than fifty years ago, long before the proliferation of computer and telecommunication systems we rely on today. The stresses that our increased power needs exert on the grid are shown through unreliable service and blackouts, which pose significant economic and safety threats to our society.

Smart grids offer a number of improvements, including some that automatically monitor and evaluate grid conditions, and report these conditions back to the utility’s control room. Devices on the network can communicate with each other to automate re-routing and switching to avoid power lines with faults, and detect and even repair faults in wires before they lead to outages.

The smart grid also introduces a new level of communication between the consumer and the power suppliers. The current interface between the suppliers and the customer is the meter, which has remained basically the same, technologically-speaking, for the past century, and cannot communicate information to or from the consumer. Smart grids, however, allow power companies and consumers to gather precise information about the quantity and timing of household consumption, and enable consumers to receive information, such as real-time pricing and emergency grid requests to lower energy consumption.

Smart grid improvements will also integrate with intermittent energy sources that pose a challenge to the current system, like wind and solar power. New technologies will encourage consumers to invest in “distributed generation,” or locally-generated power sources, such as solar panels on a home, to supplement their power needs. Making such investments worthwhile to consumers also requires regulatory change to allow different pricing contracts. For example, a home could be powered by its own solar energy during they day, and the consumer could sell any extra energy produced by his or her panels back to the larger grid (this contract option is called “net metering”). The credit for the energy sold during the day may cover what the home uses that evening. Smart grids would also accommodate plug-in hybrid cars, allowing consumers to move away from petroleum-based transportation.

Despite all of the benefits offered by smart grids, such a dramatic change in technology and approach will not be immediately adopted by industry or by regulators. Pilot projects, such as one recently completed in the Pacific Northwest, are important opportunities for researchers and regulators to learn about the potential effects of smart grid technologies.

In Washington State, the GridWiseTM Olympic Peninsula Project, managed by the Pacific Northwest National Laboratory and funded by the U.S. Department of Energy, tested smart grid technologies in more than 100 homes as well as with several commercial and municipal partners. In the Olympic Peninsula, population growth is putting pressure on the existing system. Rugged terrain and the citizens' desire to maintain the area's scenic beauty led to a search for alternatives to new power plants and wires.

During the project, residential customers chose among contract types ranging from today’s fixed-price contracts to real-time pricing that could change as frequently as every five minutes. Their homes were then equipped with technology that allowed them to program appliances such as thermostats, water heaters, and clothes dryers via the internet to automatically respond to retail price changes. For example, one could set an ideal temperature for their home, as well as an acceptable range the temperature could fluctuate within, based on price. If customers preferred their homes to be a warm 75 degrees during January, they could set a minimum of 65, allowing the temperature to drop temporarily if prices climbed too high. Consumers could change their settings (and override them) to reflect their preferences, allowing them to choose along a continuum of comfort and economy.

The project also included cash incentives based on the actual costs of producing and delivering electricity—when demand was higher, so was the price . These incentives were designed to encourage consumers to decrease their consumption during peak periods, which would alleviate stress on the grid, making the system more reliable and less vulnerable to outages.

After one year, consumers saved approximately 10 percent on electricity bills over the previous year, despite the fact the electricity prices generally rise from one year to the next. At the same time, peak demand fell by 15 percent. Peak demand reductions are especially meaningful, because power plants and wires built to meet peak are only used during a few hours per year. Reducing peak means spending less to build those resources, and it can also mean an increase in environmental value, because less efficient resources are often called in to meet this kind of demand.

Although the project involved only 112 homes, it showed that smart grid technology not only enhances electric grid reliability and reduces outages, but also creates smaller electricity bills for consumers and could alleviate the need for additional infrastructure. At a time when advantages to the economy and the environment are so critical, smart grid technologies could prove to be a real solution to our growing energy needs. As shown by the Olympic Peninsula project, the necessary technology already exists. For smart grid investments to become a reality and benefit consumers, regulatory rules and industry business models will also have to change, because existing regulation gives consumers and utilities few incentives to pursue energy-efficient, price-responsive technology.

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